So you’ve received a statutory demand…

A creditor can serve a statutory demand for payment of a debt/s pursuant to section 459E of the Corporations Act 2001 (Cth) (“the Act”) if the debt/s is/are due and payable to the creditor by the company and the total amount must be at least the statutory minimum (presently $2,000.00).

The company that is served with the statutory demand has twenty-one days from service in which to respond in one of the following three ways:

1. pay the amount sought by the creditor;
2. secure or compound for the amount of the debt, to the creditor’s reasonable satisfaction; or
3. file and serve an application seeking to set aside the statutory demand;

failing which there is a rebuttable presumption of insolvency created upon which the creditor may rely upon to apply to the court seeking to wind up the debtor company.

What the above illustrates is that failing to respond, or come to a resolution with a creditor, within those twenty-one critical days can have severe consequences for your company.

Please note that this article is for information purposes only and is not a substitute for legal advice. Please contact JHK Legal office if you require advice on this topic.

What should you do if you receive a statutory demand?

JHK Legal often assists clients when they are served with statutory demands.

We suggest that you send the statutory demand to our office as soon as possible with all the relevant information regarding the debt/s – including invoices, correspondence and any court documents  (for example, a judgment). We can then advise of your best options moving forward.

We understand that this can be a stressful period of time, particularly as facing the option of paying the demanded amount in a short period of time may put stress on your cash flow.

What happens if you pay the debt in the statutory demand within twenty-one days of service?

If you pay the debt the subject of the statutory demand within twenty-one days of service, the statutory demand ceases to have effect. We would suggest for completeness to obtain confirmation in writing that the creditor will not take any further steps.

It must be noted that payment is not an admission that the debt is owing and does not stop the debtor company from appealing any judgment behind the statutory demand.

What does it means to “secure or compound” a debt to the creditor’s satisfaction

“Compounding a debt” means the creditor accepting an arrangement for payment of the amount of the debt or for a different amount.

The compounding or securing:

1. requires there to be a mutual agreement between the debtor and creditor (note, that this can be inferred from the conduct of parties); and

2. must also recognise that the debt is due and payable.

The phrase “to the creditor’s reasonable satisfaction” means that where a debtor puts forward a proposal that is subsequently rejected, a court may decide whether rejecting it was reasonable in all the circumstances of the matter.

On what basis may a statutory demand be set aside?

A statutory demand may be set aside pursuant to:

1. section 459H of the Corporations Act 2001 (Cth) if the Court is satisfied of either or both of the following:

• there is a genuine dispute between the company and the creditor about the existence or amount of a debt to which the statutory demand relates; or

• the company has an offset claim; and/or

2. Section 459J of the Corporations Act 2001 (Cth) if the Court is satisfied that:

• because of a defect in the statutory demand, substantial injustice will be caused unless the statutory demand is set aside; or

• there is some other reason why the statutory demand should be set aside.

What is a genuine dispute?

The company seeking to set aside the statutory demand has the onus or proving a genuine dispute on the balance of probabilities.

There is a great amount of commentary as to what constitute a “genuine” dispute, however we find White J decision in Soudan Lane Pty Ltd v Glen Bradshaw t/as Pacific Coast digital [2007] NSWSC 772 to be quite useful in trying to understand the concept:

“a genuine dispute will exist about a debt if there is a plausible contention requiring investigation that the company is not indebted.”

There are two types of genuine dispute – one that relates to the “existence” of the debt, the other to the “amount”. With that in mind, to have a statutory demand set aside the Court must be persuaded that there is a genuine dispute in relation to the:

1. the existence of the debt; or

2. part of the debt if, when subtracted from the total amount of the debt identified in the statutory demand, that part of the debt is less than the statutory minimum of $2,000.00.

In relation to the second option, if the substantiated amount of the demand is equal or greater than the statutory minimum then the Court may make an order varying the demand as specified in the order and declare that the statutory demand to have had effect, as varied, from when the statutory demand was served on the company.

What is an offsetting claim?

Section 459H(5) of the Act defines an offsetting claim as

“a genuine claim that the company has against the respondent by way of counterclaim, set-off or cross-demand (even if it does not arise out of the same transaction or circumstances as a debt to which the demand relates).”

With that in mind, to have a statutory demand set aside on this basis the Court must be persuaded that there is an offsetting in relation to the:

1. all of the debt; or

2. part of the debt if, when subtracted from the total amount of the debt identified in the statutory demand, that part of the debt is less than the statutory minimum of $2,000.00.

Much like with a genuine dispute, if the substantiated amount of the demand is equal or greater than the statutory minimum then the Court may make an order varying the demand as specified in the order and declare that the statutory demand to have had effect, as varied, from when the statutory demand was served on the company.

What is a defect that will cause substantial injustice?

Section 9 of the Act defines a defect as including:

“ (a)  an irregularity; and

 (b)  a misstatement of an amount or total; and

 (c)  a misdescription of a debt or other matter; and

(d)  a misdescription of a person or entity.”

It must be kept in mind though, to be a basis to set aside a statutory demand, it must not just be a defect, but one that will cause substantial injustice.

Examples of defects that have caused substantial injustice resulting in the demand being set aside include a failure to include in the statutory demand a clear an unambiguous description of the debt (or debts), or three independent creditors issuing a single statutory demand claiming a composite amount from the debtor (where the composite amount claimed comprises separate amounts owed to each creditor). In the latter of the two examples, the Court found that the statutory demand gave no indication regarding how the debtor was to ‘pay, compound or secure’ the amount claimed where there were three separate creditors with three separate amounts.

Examples of defects that do not cause substantial injustice include an omission of the “warning” box in the statutory demand, an omission of the signature from the statutory demand and omission of notes from the statutory demand, amongst many other items.

What other reasons why a statutory demand should be set aside?

The expression “some other reason” in section 459(J)(1)(b) of the Act is quite broad, however we find that quite often if there is a cause for a statutory demand to be set aside under this subsection it is likely to stem from one of the following reasons:

1. in some cases if the conduct of the creditor in issuing the statutory demand is an abuse of process, is unconscionable or gives rise to substantial injustice;

2. there are certain problems relating to the affidavit in support of the statutory demand (if the statutory demand is not supported by a judgment debt); or

3. if the statutory demand is supported by a judgment debt in some cases if that debt is subject to an appeal, stay or has been set aside.

Summary

What the above illustrates is that the law surrounding statutory demands is quite complex. Deadlines are strict and can have severe consequences. If you receive a statutory demand, we suggest that you contact your local JHK Legal office to obtain advice as soon as possible.

Alicia Auden

Associate Director – Brisbane